2) A U.S. firm has to pay Euros 400,000 in 1-year. The firm decides to hedge foreign exchange risk using a 100% money market hedge. The 1-year risk free rate in US is 4% and 3% in Euros. The US firm's 1-year borrowing rate in USD is 6.5% and 5.5% in Euros. The current spot rate is $1.10/Euros. If the spot rate in 1 year turns out to be $1.05/Euros, how much U.S. dollars would be needed to payoff the Euros payable? Ans: $454,951.5

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.